THE TAX ATTIC with Jerry Coon

In a June 28, 2012 commentary, Jack McHugh of the Mackinac Center for Public Policy recently analyzed what the Patient Protection and Affordable Care Act (ACA) means to the average American. To quote Mr. McHugh: “For Americans, the world has changed. What do the law’s provisions mean for you? For starters, employer-provided insurance is an endangered species. For political reasons, the penalty the law imposes on employers who don’t provide insurance was made much lower than the cost of insurance, which will now be much higher due to the law’s insurance policy coverage mandates. This means it will make much more sense for employers to just drop their coverage and let employees go to the government ‘exchange’ for insurance.”

This is just Mr. McHugh’s opinion, of course.

However, after reviewing several columns written by a variety of public policy experts, I have come to the conclusion that Mr. McHugh and the others are most likely correct. ACA was meant to provide a structure and incentive for the 30-50 million taxpayers who don’t currently have health care insurance to buy insurance. The structure is the state-run exchange system with policies that appear to be similar to today’s Health Savings Accounts. The incentive is the federal subsidy that will keep the policy costs affordable.

For example, a family of four with earnings of $50,000 will receive a subsidy of approximately 76% of the policy cost. A net cost of 24% may be hard to pass up.

As confirmed by the Supreme Court, taxpayers will either buy insurance or they will be penalized. The subsidies will help to guarantee most will buy insurance. It appears there won’t be many individual penalties assessed. What employer “penalty” then is Mr. McHugh referring to in his commentary?

Currently, there are approximately 170 million taxpayers with employer-paid group insurance. For small employers with less than 50 employees, there are no penalties for not providing health insurance to their employees. With the advent of the exchanges, it may make financial sense for these small employers to drop their insurance, encourage all of their employees to go to the exchanges, and perhaps offer to pay their employee’s unsubsidized policy amount. For employers with 50 or more employees, the decision to drop or not provide health insurance will be a little more complicated since the ACA mandates that these larger employers must provide health insurance for their employees.

This is the area of penalties that Mr. McHugh was alluding to in his commentary.

If the employer ignores the mandate, it will cost the employer a $2,000 nondeductible penalty for each employee after the first 30 employees that the employer chooses not to cover. For each employee who goes to the exchange and qualifies to receive a premium subsidy, that $2,000 penalty will increase to $3,000 for each of those employees.

It’s easy to see that the penalties could be substantial. However, let’s go back to our earlier example of the employee earning $50,000 who receives a subsidy of 76% of the premium cost and therefore pays a total of 24% for his policy.

Let’s say the employee’s initial premium is $10,000. He ends up paying 24% of this figure or $2,400. The other 76% or $7,600 is paid by the federal government. After the transfer to the exchange, the employee pays $2,400 and the United States Treasury pays $7,600. Right now the employer is paying 80% of the $10,000 and the employee is paying 20% or $2,000. At the exchange, the employee is net out of pocket an additional $400.

How does this work for the employer? For starters, it saves the 80% or $8,000 it was paying for the employee’s insurance. It is $8,000 to the good. It is penalized, however, $3,000 because the employee is receiving a premium subsidy. Now it is $5,000 to the good. The employer reimburses the employee his total out-of-pocket policy expense of $2,400. Now the employee is completely held harmless in this deal and the employer is still $2,600 to the good. That is $2,600 for each of his employees. In effect, the penalty is not high enough to get the employer to not drop the employee’s insurance.

Putting it another way, the subsidy paid by the government is too high in relation to the final cost. Either way, employers pay large amounts of money to financial people to run these calculations. It won’t take an MBA to make a recommendation to drop employer-sponsored health insurance. Some of the commentators believe the goal of the ACA all along was to get employers out of health insurance. I’m not so sure of that, but I do believe that’s what might happen in the long run. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent and a Registered Tax Return Preparer. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry through his website: www.actiontaxservice.com.

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